Audit committee-auditor interlocking and audit fees: evidence from China

ABSTRACTThis paper examines the effect of audit committee-auditor interlocking on the audit fees in a sample of listed Chinese companies from 2005 to 2018. It is found that audit committee-auditor interlocking significantly increases the audit fees, and this positive relationship is more significant in better external governance environments, as measured by the marketization level, legal environment, regulatory intensity, and analyst attention. Further analyses show that the interlocking has a greater positive impact on audit fees when it is caused by the audit committee chair, audit partner, and industry specialist auditor, and when the interlocking companies are operating in the same industry. The interlocking relationship also increases audit quality and reduces the stock price crash risk in which the audit fees play the mediating role. The results suggest that it’s the reputation mechanism that motivates audit committee directors and auditors in interlocking relationships to increase audit fees and audit quality. We provide practical implications for auditors, listed companies, investors, and regulators in aspects of increasing audit fees and audit quality, protecting investors’ interests, and improving the external governance environments.KEYWORDS: Audit committee-auditor interlockingaudit feesexternal governance environmentaudit qualityJEL CLASSIFICATION: M42G30M40 Disclosure statementNo potential conflict of interest was reported by the author(s).Data availability statementThe data that support the findings of this study are available from the corresponding author upon reasonable request.Ethics approval statementEthics approval is not required for this research.Notes1 Referring to Bae et al. (Citation2021), the variable Interlock is actually the interaction term between Intlk_Com and Interlock. If Interlock is equal to 1, so is Intlk_Com. Therefore, we only show the interaction term and Intlk_Com in Model (3). Another approach would be to include only the interaction term but use the company fixed effect in the model. For robustness consideration, we also use this approach and the interaction term is also positive and statistically significant at the 5% level, which complies with the hypothesis.Additional informationFundingThis work was supported by the National Social Science Fund of China under Grant (18BGL091) and Graduate Education Innovation and Reform Project of Sichuan University (GSGJHKC2021).